Archive for August, 2007

The Fed Descends On Jackson Hole, The Market Won’t Get What It’s Looking For

David Kosmecki | August 31, 2007 in Uncategorized | Comments (0)

Today is a holiday-shortened session but that doesn’t mean that the markets will be on vacation.

The day’s big event is Federal Reserve Chairman Ben Bernanke’s speech at the Fed’s annual symposium in Jackson Hole, WY.

Investors will dissect every phrase looking for clues about the economy and housing.

More importantly, markets want some advance notice about whether the Fed will lower the Fed Funds Rate at its next meeting September 18.

It won’t get any.

Just before his address was scheduled to begin, the Fed’s favorite predictor of inflation — the Personal Consumption and Expenditures report — was released and showed that growth is within a tolerable range.

It’s more likely that Bernanke will spend time talking about data that is known (i.e. the PCE report and other measurable statistics) versus data that is unknown (i.e. how the credit markets will impact the U.S. economy in the future).

With fewer traders participating today, expect more volatile action than usual as the three-day Labor Day Weekend begins.

How The Stock Market Rally Changed Mortgage Pricing For The Worse

David Kosmecki | August 30, 2007 in Uncategorized | Comments (0)

Mortgage rates unexpectedly increased yesterday afternoon as the U.S. stock market staged a late rally.

By the end of the day, the Dow Jones Industrial Average was up 1.9 percent, or 247.77 points.

This is a typical pattern.

When stocks are moving higher, investors want to ride the wave and look for sources of cash. Often, bonds serve as that source.

Now, remember that mortgage rates are based on the price of mortgage bonds. When bond are in demand, bond prices increase and the associated rates fall. When bond are being sold — as what happened yesterday — prices decrease and that pushes mortgage rates higher.

That’s what happened yesterday.

As the DJIA added 150 points in the last two hours of trading, mortgage rates rapidly worsened. If you locked your rate in the afternoon, it may have been markedly worse than if you locked in the morning.

Mortgage rates are expected to be at least 0.125% worse when the markets open this morning.

How Credit Cards May Be Replacing Home Equity As A Funding Source

David Kosmecki | August 29, 2007 in Uncategorized | Comments (0)

Credit card spending is increasing

As mortgage guidelines loosened between 2002 and 2006, homeowners often used their home equity to retire credit card and other consumer debt. They did this by increasing the size of the mortgage and taking “cash out” from their home.

As you’d expect, this type of mortgage transaction is called a “cash out” refinance.

Well, now that mortgage guidelines are tightening, it’s growing more difficult for a homeowner to engage in this type of home loan.

Mortgage lenders are restricting the total amount of equity that can be withdrawn from a home, usually as a percentage of the home’s value.

This may be one reason why the amount of credit card debt is rapidly increasing among Americans.

Throughout May and June, for example, credit card balances increased 12% and 8% respectively even as consumer spending remained relatively flat.

Therefore, we can hypothesize that Americans — unable to “cash out” from their homes — are putting more money on their credit cards and slowly reaching their collective credit limits (upon which the borrowing stops).

When the borrowing stops, spending stops, too, and this has the impact of slowing down the economy.

A slower economy, of course, reduces inflationary pressures and that makes the U.S. dollar stronger to international investors. That strength, in turn, creates buying pressure on mortgage bonds which pushes mortgage rates down for everyone. Naturally, lower rates encourage more borrowing.

Yes, it’s a cycle. And it’s one worth watching.

Market Update – August 28, 2007

David Kosmecki | August 28, 2007 in Uncategorized | Comments (0)

Risks favor: Locking

bias – Bond pressed against strong resistance at 200-day Moving Average

Current Price of FNMA 6.0% Bond: $100.16, Unchanged

Bonds are fighting a key barrier of overhead resistance at their 200-day Moving Average. Prices closed exactly at this ceiling yesterday and have been pushed modestly lower so far today. Stocks are lower as well, typically a friendly sign for Bonds. But the 200-day MA has put a lid on any further advance, and we are concerned that this firm barrier will turn the tide and send prices lower.

US Consumer Confidence weakened sharply in August to its worst level in a year. The closely watched sentiment indicator fell to 105.0 from a high of 111.9 in July. The decline was the sharpest since the aftermath of Hurricane Katrina. The drop has been attributed to the relentless bad news from the credit crunch in financial markets.

At 2pm ET today the Fed will release the Minutes from the August 7th meeting. It will be interesting to get the Fed’s views on the credit crunch, since it was just beginning to unfold at the time they met. The Fed Fund Futures are currently showing a 72% probability of a .25% cut at the September 18th meeting, with some predicting a chance of a .50% rate cut.

What’s The Existing Home Sales Report Got To Do With You? Nothing.

David Kosmecki | in Uncategorized | Comments (0)

When the National Association of Realtors® releases its monthly Existing Home Sales report, people tend to watch every word, fact and figure in the statement in hopes of decoding the real estate market.

It’s all wasted energy.

It’s impossible to use the NAR report in everyday living because the NAR report is a national story. Real estate, on the other hand, is not a national market.

All real estate is local.

Think of your own town. There’s at least one each of the following:

  • An improving neighborhood
  • A declining district
  • An abandoned area
  • An out-right scary street

In a national report, these regions are lumped together into one measurement.

So, when we see that the median home sale price fell over the last year, or that national inventory rose to a 9.6 month supply, it doesn’t really mean much to your street in your town.

The NAR report lumps every street in every town together into one big blob of data.

Your area may be seeing explosive growth tied to school districts, or affordability, or proximity to transportation, or just plain “good value” — regardless of what national real estate statistics report.

So, as always, be wary of “national” real estate stories — the true story is a local one.

Market Update – August 27, 2007

David Kosmecki | August 27, 2007 in Uncategorized | Comments (0)

Current Price of FNMA 6.0% Bond: $100.09, +12bp

“I hear you knocking…but you can’t come in”. Presently, Bond prices are knocking at the door of a powerful ceiling of resistance at the 200-day Moving Average. And if history is any indication, Bond prices will be turned away and pushed lower once the 200-day MA is hit. Traders will have to stop hiding under their hats and stop denying that the 200-day MA looks bad…it will be very tough to break, since it has only been crossed twice during the past year, and only three times in over two years.

Existing Home Sales during July were reported at 5.75 Million units which was essentially in line with expectations. The median home price fell just 0.6% to $228,900. The inventory of unsold homes rose to a level of 9.6 months. Overall, the report was not bad with the exception of the spike in inventory, which is a little concerning. We will be monitoring next month’s report to see if the liquidity crunch, which began last month, affects home purchases in August.

This week does offer some high impact economic reports which could influence pricing, including tomorrow's Consumer Confidence, second-quarter GDP on Thursday and the big enchilada for the week on Friday, the Core Personal Consumption Expenditure index (PCE), the Fed's favorite measure of consumer inflation. And it is likely that the PCE and next weeks Jobs Report will be the final deciding factors as to the Fed’s decision on cutting rates at the September 18th meeting.

Bonds are overbought and trading just below a tough ceiling of resistance. For now we are floating, but with a finger on the trigger to lock once the expected pushback from the 200-day Moving Average begins.


The Week In Review (August 27, 2007) : What To Watch For

David Kosmecki | in Uncategorized | Comments (0)

This week is data-heavy so markets will finally get to focus on fundamentals instead of fear.

For the past two weeks, uncertainty about the economy has led to psychologically-driven mortgage interest rate movements.

Rising defaults devalue mortgage holdings and many investors are now expecting the defaults levels to rise even more.

When defaults exceed expectations, it indicates that the risk of holding mortgage notes was estimated to be too low. As the risk is adjusted higher, mortgage rates are move higher, too.

This is a major reason why jumbo loans — loans over $417,000 — are suddenly carrying much higher interest rates.

Note: The chart above does not reflect actual mortgage rates. It is meant to show how jumbo loans are moving in a different direction from conforming, 30-year fixed rate home loans.

Markets will have some hard data upon which to reflect this week including two consumer confidence reports and the Personal Consumption and Expenditures report. The former is often to determine consumer spending patterns (although it doesn’t often work) and the latter is the Federal Reserve’s preferred inflationary gauge.

Expect markets to be especially volatile towards the end of Thursday and for all of Friday — many traders will be leaving their posts early for the three-day Labor Day weekend.

Market Update – August 24, 2007

David Kosmecki | August 24, 2007 in Uncategorized | Comments (0)

Risks favor: Cautiously Floating

Current Price of FNMA 6.0% Bond: $99.81, +3bp

Durable Goods Orders soared in July, rising by a far greater than expected rate of 5.9% and scoring their largest gain in about a year. Transportation goods such as airplanes, autos, and trucks led the surge, but other long-lasting goods like machinery, computers, and steel products also showed strong demand. When excluding vehicles, Durable Goods increased by a still-strong 3.7%. This report is volatile from month to month, so Bonds didn’t react much on the strong economic news.

Sub-prime news abroad – The Bank of China (BOC) revealed a far greater exposure to US sub-prime mortgage investments than expected. The BOC disclosed about 10% of their US Dollar denominated assets consisted of sub-prime mortgage investments valued at $10 billion. This story will continue to develop.

New Home Sales

was reported at 870,000, which was better than expectations of 825,000. The monthly sales inventory came in at 7.5 months, which is less than last month’s reading and well below March’s reading of 8.3. And the median sales price rose 0.6% year over year. Overall a pretty good housing report considering the present landscape in the lending industry.

A number of economists believe the economy is moving toward a recession because of the events in the mortgage and housing sector. We believe the Fed will soon begin to cut short-term interest rates in an effort to help the economy avoid this. With inflation on the decline and now inside the Feds target range, and with the Job market showing signs of moderating, the Fed should have a “green light” for a cut on September 18th.

Bonds are trading in a sideways pattern along key support at the 100-day MA, presently at $99.57. We are continuing to advise floating as the Bond remains above this solid floor of support.

Understanding Real Estate Terms: Absorption Rate

David Kosmecki | in Uncategorized | Comments (0)

Defining Absorption Rate in real estate terms

In light of today’s New Homes Sales data and Monday’s forthcoming Existing Homes Sales report, let’s review a term that real estate professionals use to describe housing inventory.

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area.

We can use it to determine how quickly homes are selling in a neighborhood, city, or region.

The formula to calculate Absorption Rate is simple:

  • Add up the number of homes on the market
  • Divide it by the number of homes taken off the market in the past 30 days because offers were accepted for the sale of those homes

For example, if 500 homes are on the market and 89 of these homes received offers in the past 30 days, the absorption rate is 500/89, or 5.6 months.

In generally, the smaller the absorption rate, the more seller-friendly the region.

Market Update – August 23,2007

David Kosmecki | August 23, 2007 in Uncategorized | Comments (0)

Risks favor: Cautiously Floating while above the 100-day MA

Current Price of FNMA 6.0% Bond: $99.75, 0bp

In an interesting move yesterday, four major US banks stepped up to the Fed's 'Discount Window' and borrowed $500 Million apiece. Speculation is swirling over the motives behind the borrowings by Bank of America, Citigroup, JP Morgan Chase, and Wachovia Bank. Most analysts believe the Discount Window borrowing by these huge, well capitalized banks was largely symbolic, and designed to calm financial nervousness in the credit markets.

It may take some time to discover the true reason behind the borrowings, but a clue may come from the Fed this afternoon at 4:30pm ET when they report on the total amount of Discount Window borrowing over the past week. It will be interesting to see just how much liquidity has been injected into the banking system via the Fed's Discount Window borrowing system – especially following the Fed’s cut to the Discount Rate last week.

Today, the Bank of Japan (BOJ), Japan 's Central Bank, decided to keep any changes to their primary interest rate on hold for the time being, in an effort to help stabilize financial markets. The BOJ would probably have liked to bump up their rates to fight local inflation, but they realized it may have prompted a further unwinding of the 'Yen Carry Trade' and could lead to additional disruptions in global stock and credit markets. Their decision to hold on rates was a positive for the US Stock market today, as our Stocks typically come under heavy selling pressure as the Yen Carry Trade unwinds.

In the day's only economic report, Initial Jobless Claims was reported at 322K, and near expectations. It is interesting to note that a number closer to 300K used to be the norm for Initial Jobless Claims…and now it’s creeping closer to 325K. This indicates some softening in the labor market. Remember that one of Fed Chair Bernanke’s concerns over the past year was strong labor markets leading to wage based inflation – so this apparent softening is one more reason the Fed is highly likely to cut the Fed Funds Rate at the next meeting.

Mortgage Bonds remain above a floor of support at the 100-day Moving Average. With this floor just beneath present levels and the next ceiling of resistance about 42bp higher, at the 200-day MA – we continue to advise floating. But should prices turn lower and move beneath the 100-day MA, we will shift to a locking bias.